• Singapore Exchange (SGX)’s implied FY23F (Jun) securities daily average value (SDAV) and the derivatives daily average volume (DDAV), based on the first five months of data, are tracking our forecast. While SDAV improved m-o-m, the y-o-y weakness has persisted. If this weakness continues, there could be downside risks to our FY23 estimate.
• The recent rebound of SGX's share price has brought its forward P/E in line with the historical mean – which is fair, in view of an earnings decline in FY23F and its unexciting 3.5% dividend yield.

SGX's Nov Securities Volume Up M-o-m But Still Down Y-o-y

• In November, the total securities market turnover value of SGX was S$27.2bn (-3% y-o-y, +18% m-o-m), while the SDAV stood at S$1.24bn (-8% y-o-y, +7% m-o-m). The STI gained by 6.4%, and registered its strongest price performance since Mar 2021.
• During the month, SGX also saw the listing of NoonTalk Media on the Catalist board. NoonTalk Media is a Singapore-based media entertainment company that specialises in artist & talent management, multimedia production and event conceptualisation.
• The implied FY23F SADV for SGX, based on the first five months of data for FY23, is 1.3% above our estimate..

Strong FX Volume Growth Supports Higher Derivatives Volume Y-o-y

• In November, the total derivatives traded volume of SGX rose to 23.7m contracts (+30% y-o-y, +8% m-o-m), the highest reported by SGX since March. The DDAV was 1.08m (+24% y-o-y, -2% m-o-m). The expectations of China’s gradual reopening and expanded government support for the country’s property sector fanned the risk-on sentiment in Asian equities, currencies and commodities.
• Amongst SGX’s derivative offerings, the volume of SGX FTSE A50 Index Futures increased 24% y-o-y to 9.3m contracts, while benchmark iron ore derivatives gained 69% y-o-y to 3.2m contracts.
• Hedging activity on SGX’s FX OTC and futures marketplace accelerated amid US$ weakness. Total FX futures traded volume surged 104% y-o-y 4m contracts, which is an all-time high. We have provided our earnings and target price sensitivity to changes in SDAV and DDAV, see details in report attached below.

SGX's Historical Mean P/E Seems Fair

• SGX’s current one year forward P/E of 22x is in line with its historical average P/E. As we foresee downside risks to our and consensus estimates from the ongoing weakness in SDAV, we recommend that investors wait for a better entry point. In addition, SGX’s dividend yield is well below the STI’s forward yield of 4.9%.
• Our target price is based on a target P/E of 21x on 12 months’ forward EPS.

• Our target price includes an ESG premium of 8% over its fair value of S$8.60, as per our in-house proprietary methodology. Maintain NEUTRAL on SGX with S$9.30 target price, 2% upside.

Source: RHB Invest Research - 13 Dec 2022